Wednesday, September 14, 2011

The August headline Producer Price Index came in per expectations (0% change for the month), while the core PPI came in a bit lower than expectations (0.1% vs. 0.2%). On the surface this sounds good, but from a longer term perspective, as the chart above shows, we are likely still in a rising inflation environment.

Over the past three months, the core PPI has risen at a 3.4% annualized rate, which puts it well above the range of 1993-2007. And as I have noted repeatedly over the past year or so, when both core and headline measures of inflation rise at the same time, it is a good indication that monetary policy is accommodative. When money is tight, then increases in food and energy prices force other prices lower. When money is easy, all prices can rise. Plus, it is significant that inflation can be as high as it has been in recent years despite the economy's agonizingly slow recovery and its huge output gap; only easy money can explain that.

This next chart shows the index itself, plotted on a semi-log scale so that the slope of the line equates to the rate of change. I've divided the past 50 years into several different inflation regimes: the early 60s, when inflation was extremely low and stable; the period from '66 through '73, when inflation pressures started to build; the '74-'82 period when a plunging dollar, soaring commodity prices and a Fed that couldn't figure it out pushed prices up 9% per year on average; the '83-'03 period, when the Fed successfully tamed inflation and kept it relatively low; and the past six years, when first Greenspan and then Bernanke started using monetary policy to "stimulate" the economy. Inflation since 2003 has been running at least double what it was during the Fed's golden years (1983-2003).

Note also that even though inflation has been relatively low and stable since 1983, the level of producer prices has risen by a total of 88%—almost double. Moreover, the CPI has increased 131% over the same period. Just a few percentage points a year can really add up over time.

15 comments:

All the economic charts are so bad that I am having trouble deciphering the state of the US and global economies -- something is going to have to give -- in the US, monetary expansion has been rejected, and austerity measures have stalled -- that leaves only a national default as the remaining option -- doing nothing (what the US is doing now) will result in default -- said another way, default appears imminent if the nation proves unable or unwilling to proceed with either monetary expansion or austerity -- here's a summary of what fiscal and monetary policies today:

PS: If default is imminent, than we can all look at the bright side -- an outright default on all US Treasury bonds would end deficit spending, cancel $14 trillion in debt, and eliminate interest payments going forward -- the resulting balanced budget would no doubt rout entitlements and discretionary spending -- moreover, the lack of credit-worthiness would effectively end all future borrowing by the US, leaving economic growth as the way to expand Federal revenues -- the default option was not my first choice as I was an early advocate for monetary expansion -- however, the biggest losers from a national default would be government, public employees, and people who live on entitlments -- if default is what happens, then so be it...

PPS: Dividend and rent-paying equities are the best way to protect one's estate from a national default...

Stable price policy not necessarily the tell tale of the effects of money printing on the economy.

Great article on the mises.

"The fact that general prices were more or less stable during the 1920s told most economists that there was no inflationary threat, and therefore the events of the Great Depression caught them completely unaware."

wjmk: I think you are mistaken about the consequences and imminency of a US default. When a government defaults on its debt, it results in a transfer of wealth from the owners of that debt (the public, institutions, and other governments) to the defaulting government. The private sector loses, and the government wins (including public sector workers), because it frees itself from making interest and principal payments. This could potentially open the door for an ongoing increase in government spending of all sorts, including entitlements. Moreover, a default does not permanently shut the door to future deficit spending. Dozens of governments have defaulted repeatedly over the years.

As for California, its default prospects have plunged of late, since the deficit has declined significantly. The state sold notes today the resulted in a 90% decline in borrowing costs. California is paying only 19 bps above AAA-rated borrowers, according to Bloomberg.

A US default remains inconceivable for all intents and purposes.

Austerity is alive and well in Washington and in many other governments (even Italy).

DWJM: Concerning a default and repudiation of the federal debt, something similar has happened before following the panic of 1837 with several states. Nine states defaulted on their debts and 5 of those states repudiated their debts (MI, MS, AR, FL, LA).

These states all had something in common. When the panic occurred, they were not in bad fiscal shape. Shortly after the panic, the economy rebounded in 1838-39, then turned back down in 1840-42. If this sounds a little bit familiar just wait. Do you know what these states did to get themselves in trouble? From 1837 to 1842, these states doubled their outstanding debts. What did they spend this money on? The two main areas were infrastructure projects ("stimulus") like large canals, and the second was state bank capital.

Compare that to today. On June 30, 2008, the federal government had $5.279 trillion in debt to the public. Today, they owe $10.067 trillion to the public. What did they spend their money on? Bank bailouts (Fannie, Fred) and "stimulus."

Those who hope to avoid a national default must elect either monetary expansion or austerity -- but choose your poison wisely -- if nothing is implemented by Congress and/or the Federal Reserve, then a national default is imminent -- again, each of us must decide which option best fits our nation's (and our personal) needs from these three options: a) monetary expansion ("printing money"); b) austerity (spending cuts and/or tax increases; or c) default -- again, choose wisely...